Hon Dr Michael Cullen
Minister of Finance
Securing Your Future: budget savings package
"Budget 2005 will help New Zealanders to save, giving them greater security and choice and strengthening the economy," says Finance Minister Michael Cullen. "The Securing Your Future package will make it easier for people to develop a long-term savings habit. It will also help many purchase their first home." Estimated to cost $588 million over the next four years, components include:    KiwiSaver, a government-sponsored work-based savings scheme, including features to assist first home purchase; a substantial expansion of the Mortgage Insurance Scheme and; education programmes for financial literacy and home buyers.
KiwiSaver will be a voluntary scheme, enabling people to put 4 or 8 per cent of their gross salary automatically into a savings fund. Savers will have personalised accounts they can take with them as they shift jobs. "The government will kick-start each person’s account with a contribution of $1000," Dr Cullen said. "It will also pay part of the fund management fees, increasing the return that people get on their investment." To make participation easy, new employees will be automatically enrolled in KiwiSaver and have three weeks to decide whether to remain members. Existing employees, the self-employed and beneficiaries will be able to opt in. "Policy design for KiwiSaver is well-advanced," Dr Cullen said. "We expect to introduce legislation to the House toward the end of this year and see it passed next year, enabling KiwiSaver to open on 1 April 2007." Dr Cullen said the government aimed to lift New Zealand’s household savings rates, which are among the lowest in the OECD. "Low savings and a high external debt to GDP ratio put pressure on our current account balance. This makes New Zealand vulnerable to shifts in the
availability and price of international capital, and adds a premium to our interest rates. "Increasing our pool of domestic savings should lessen our exposure to these risks. It could also strengthen the flow of finance to New Zealand businesses, given that investors tend to prefer to invest in their home market. "Savings also benefit the individual, conferring a greater sense of financial security in both work and retirement." Dr Cullen said that although KiwiSaver's main purpose was to help people save for their retirement, first home buyers would be able to withdraw their funds for a deposit on a house. They would then be able to divert their fund payments into repaying their mortgage. "When people have been KiwiSaver members for at least three years and are ready to buy their first home, the government will help with their deposit. They will receive $1000 for each year's membership in KiwiSaver, up to a maximum of $5000. "Our estimates are that KiwiSaver will enable around 3000 households a year to realise the dream of owning their own home," Dr Cullen said. The budget also contains measures to expand the Housing New Zealand Corporation's Mortgage Insurance Scheme, which helps people who can support a mortgage but can raise little or no deposit. Within three years, loans under the scheme are expected to increase from fewer than 1000 a year to 5000 a year. "Home ownership has been declining, and New Zealand will be better off if we can reverse this," Dr Cullen said. "The security of home ownership is linked with better health and educational achievement and a stronger sense of community. Ownership helps people participate in society, giving a sense of control and independence." Education programmes for financial literacy and home buyers will be developed over the coming year, giving New Zealanders more opportunities to pick up knowledge that helps them save and invest successfully. Contact: Patricia Herbert [press secretary] 04 471 9412 or 021 270 9013. E-mail: patricia.herbert@parliament.govt.nz
Hon Dr Michael Cullen
Minister of Finance
A major advance for retirement savings
The creation of KiwiSaver complements the government's commitment to ensuring New Zealanders can enjoy a decent income when they retire, says Finance Minister Michael Cullen. "The Labour-Progressive government has a strong record in promoting New Zealanders' long-term financial security. We have secured the public pension by restoring the 65 per cent wage floor and setting up the New Zealand Superannuation Fund.
"Budget 2005 commits a further $2.3 billion in 2005-06 to the Fund, which enjoys high public and political support. The Fund is now projected to have a balance of $19.4 billion by June 2009. "We have always recognised, however, that most New Zealanders aspire to a higher standard of living in retirement than NZ Super alone can provide. That is why we have tirelessly encouraged people to save. "Last July the government established the State Sector Retirement Savings Scheme for public sector employees. The response has been enthusiastic, with 46 per cent of eligible employees already signed up. "This demonstrates that New Zealanders have an appetite for this form of saving. Work-based schemes are an area where government can act constructively to increase savings rates, because they offer a broad 'reach', particularly to middle income earners. They also allow for deductions at source and have significant economies of scale. "The combination of KiwiSaver and the state sector scheme will lift the proportion of working people participating in work-based saving. Participation declined from 22.6 per cent in 1990 to 14.1 per cent in 2003 and we are confident of reversing that trend. Our working assumption is that 25 per cent of the eligible labour force will join KiwiSaver by 2012-13." Attached: Key facts on KiwiSaver Contact: Patricia Herbert [press secretary] 04 471 9412 or 021 270 9013. E-mail: patricia.herbert@parliament.govt.nz
Key facts on KiwiSaver
Savers:   participation is voluntary employees are automatically enrolled when they begin a new job, but can choose after one week to opt out, in which case they will have two weeks to advise Inland Revenue of their decision contributions will start from the next pay day after eight weeks with the employer this money will be held by IRD on the employee’s behalf for an initial eight week period during which the employee can seek financial advice and select a fund provider enrolment is not automatic for workers under 18, or for existing employees, but they can join if they wish – as can beneficiaries and the self-employed, although the latter will have to make the payments to IRD themselves savers can select their own fund and can change fund providers, but can only have one provider at any time those who do not specify a fund are randomly allocated to a default provider contributions are deducted from wages at a rate of 4 per cent of gross salary, unless the individual prefers to contribute at the higher rate of 8 per cent savings are primarily for retirement and are locked in until the age of eligibility for NZ Superannuation, except in cases of financial hardship, permanent emigration or – after a minimum of three years – to contribute toward a deposit on a first home all individuals can stop contributions for up to five years at a time.
 

  


Employers:   enrol new employees in KiwiSaver and existing employees who opt in deduct employees' contributions and forward them to the IRD along with PAYE.
Employers will be encouraged to use the infrastructure provided by the government through KiwiSaver to contribute to their employees’ accounts, with some flexibility over the terms and conditions of those payments.
The automatic enrolment provisions will not apply in workplaces where the employer is already running a work-based scheme, provided that scheme is portable, open to all permanent employees and has a total contribution rate [employer plus employee] of at least 4 per cent. Members of these schemes will be able to access the KiwiSaver home deposit subsidy.
The government:  makes an upfront contribution of $1000 per person, to be locked in until the recipient is eligible for NZ Superannuation or for five years, whichever is the greater increases the net rate of return to the saver by providing a fee subsidy, up to a cap to be negotiated with fund providers offers a first home deposit subsidy of $1000 per year of membership in the scheme, up to a maximum of $5000 for five years, to eligible KiwiSaver members after three years of saving.
 
To minimise the compliance costs for employers, KiwiSaver will be administered by Inland Revenue which:    receives the contributions and channels them to the individual’s chosen fund collates and distributes information about the scheme to employers for distribution to employees receives notification from employees wishing to opt out or take a contribution holiday and advises the employer accordingly.
Budget allocations for KiwiSaver include:    $384 million over four years for the upfront $1000 lump sum and the ongoing fee subsidy $109 million over four years for operational costs, including the proposed financial literacy programme $25.7 million in implementation funding to IRD plus capital of $12.8 million in 2005-06 and $14.8 million in 2006-07.
Hon Steve Maharey
Minister of Housing
A hand up to home ownership
"The Kiwi dream of owning your own home will be brought within the grasp of thousands more New Zealanders each year as a result of Budget 2005," says Housing Minister Steve Maharey.
The components of the package are an extension of the Mortgage Insurance Scheme, a housing deposit subsidy available through KiwiSaver, and a home ownership education programme. "When fully in place, it is expected to help 5000 to 8000 first home buyers a year," Mr Maharey said. "It does not exclude low income households, but is aimed primarily at those earning above $40,000 a year, as borrowers must be able to service a mortgage." The Mortgage Insurance Scheme [MIS] helps people who can support a mortgage but can raise little or no deposit. It was introduced as a pilot programme in 2003 by Housing New Zealand Corporation and Kiwibank. Applicants must have a good credit history, not already own a home, and intend to live in the house. The scheme enables people to borrow most or all of the cost of a house with little or no deposit. Housing New Zealand Corporation insures against bad debts by charging a premium of 3 per cent of the loan. One per cent is paid by the borrower and 2 per cent by the government. If the borrower defaults, the insurance covers any shortfall between the outstanding loan and the amount recovered through a mortgagee sale. To date, there have been no defaults. The budget aims to increase the number of loans under the MIS, from fewer than 1000 a year to 5000 a year by 2007-08. It will do this by:   allowing lenders beyond Kiwibank to participate; and raising the eligibility cap from $65,000 to $85,000 annual income for a household with one or two borrowers, and from $100,000 to $120,000 for households with three or more borrowers.
These changes will take effect in July 2005 and are expected to cost $22 million a year from 2008-09.
First home buyers who have been members of KiwiSaver for three years will be eligible for a one-off deposit subsidy of $1000 for each year of KiwiSaver membership, to a maximum of $5000. They will also be able to put their savings, plus interest, towards the price of their new home, and put their subsequent KiwiSaver contributions towards their mortgage.
Preliminary estimates are that around 3000 households a year will take advantage of the home buying assistance offered by KiwiSaver. These opportunities will be available from 1 April 2010 – three years after KiwiSaver’s start date of 1 April 2007. The annual cost is estimated to rise to around $35 million a year. The criteria attached to the deposit subsidy reflect the fact that it is intended to assist toward the purchase of a lower-cost ‘starter’ home. Income and purchase price caps will apply but have yet to be finalised. House price caps will reflect regional price variations. The deposit subsidy will be available to members of registered superannuation schemes that meet eligibility criteria. Eligibility will be determined on an individual basis. The subsidy will be in the form of a suspensory loan, rather than an unconditional grant, and will have to be repaid if the recipients stop living in the house within a reasonable period. "The housing package has been designed to be responsive to individual circumstances," Mr Maharey said. "Some home buyers will need only the Mortgage Insurance Scheme. Others might take advantage of just the deposit subsidy, or the draw down facilities from KiwiSaver. Some will need to draw on all these initiatives to get into their own home." Mr Maharey said the education programme would not be compulsory but that first home buyers would be strongly encouraged to take advantage of it to improve their knowledge of what home ownership involved. Plans were to provide seminars for 1000 people next year, rising to around 5000 a year by 2006-07, at a cost of $2.4 million a year.
"The government is conscious of the need to provide home ownership assistance that does not distort the housing market or encourage people to borrow beyond their means. I am confident we have got the balance right with this package," Mr Maharey said.
Contact: Daniel Lambert, Press Secretary, (04) 471 9154 or (021) 270 9115, email: Daniel.Lambert@parliament.govt.nz, www.beehive.govt.nz/maharey
KIWISAVER INDICATIVE BALANCES
4% Contribution Annual Weekly gross Contribution income $10,000 $8 $20,000 $15 $30,000 $23 $40,000 $31 $50,000 $38 $60,000 $46 $70,000 $54 $80,000 $62 $90,000 $69 $100,000 $77
5 year total $3,300 - $3,400 $5,400 - $5,700 $7,600 - $7,900 $9,800 - $10,100 $12,000 - $12,300 $14,200 - $14,500 $16,400 - $16,800 $18,600 - $19,000 $20,800 - $21,200 $23,000 - $23,400
20 year total $13,400 - $14,500 $25,400 - $26,800 $37,300 - $39,100 $49,200 - $51,400 $61,100 - $63,700 $73,100 - $76,000 $85,000 - $88,300 $96,900 - $100,600 $108,900 - $112,900 $120,800 - $125,200
40 year total $40,600 - $44,700 $77,900 - $84,400 $115,200 - $124,200 $152,500 - $163,900 $189,800 - $203,600 $227,000 - $243,400 $264,300 - $283,100 $301,600 - $322,800 $338,900 - $362,500 $376,200 - $402,300
8% Contribution Annual Weekly gross Contribution income $10,000 $15 $20,000 $31 $30,000 $46 $40,000 $62 $50,000 $77 $60,000 $92 $70,000 $108 $80,000 $123 $90,000 $138 $100,000 $154
5 year total $5,400 - $5,700 $9,800 - $10,100 $14,200 - $14,500 $18,600 - $19,000 $23,000 - $23,400 $27,400 - $27,800 $31,800 - $32,300 $36,200 - $36,700 $40,600 - $41,200 $45,000 - $45,600
20 year total $25,400 - $26,800 $49,200 - $51,400 $73,100 - $76,000 $96,900 - $100,600 $120,800 - $125,200 $144,600 - $149,800 $168,500 - $174,400 $192,300 - $198,900 $216,200 - $223,500 $240,000 - $248,100
40 year total $77,900 - $84,400 $152,500 - $163,900 $227,000 - $243,400 $301,600 - $322,800 $376,200 - $402,300 $450,800 - $481,700 $525,300 - $561,200 $599,900 - $640,600 $674,500 - $720,100 $749,100 - $799,600
These indicative balances assume that the government negotiates with providers to offer a low-fee basic product. The range reflects indicative balances if the government provides no contribution to fees (lower number) or if the government contribution covers all fees (higher number). The likely returns within this range to a saver will depend on the level of fee subsidy cap, which is yet to be determined.
This calculation is based on a 6% nominal rate of return compounding monthly and assuming 33% tax on interest. It assumes wages are static over the savings period and contributions and returns are constant. It includes the $1000 up-front government contribution. Indicative balance figures are rounded to the nearest $100.
SECURING YOUR FUTURE: QUESTIONS AND ANSWERS
See also Cabinet papers released on the Securing Your Future website on Budget day: www.securingyourfuture.govt.nz 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. Who is eligible to join? What is the expected participation rate? What is the government’s contribution going to be? How will the four per cent and eight per cent rate be calculated and what sort of amounts does it represent? How will members of existing superannuation schemes be affected? How does a contribution holiday work? Can KiwiSavers borrow against their savings? Will the money be protected? How will this affect home buyers? Which existing schemes will be eligible for the housing deposit subsidy? Will the housing deposit subsidy drive up house prices? Why is the government not providing tax cuts instead? Is the government doing anything to improve financial literacy? Do all employers have to offer KiwiSaver in their workplace? Are small and medium sized enterprises exempt from the scheme? What about the self-employed? Do employers have to give financial advice? Do employers have to contribute to the savings of their employees? How will employer contributions be handled to minimise compliance costs? Will this increase employers’ labour costs? What impact will KiwiSaver have on employers with existing schemes? What is the process for provider selection? Will provider numbers be limited? How will the schemes be regulated? How does this relate to the work of the financial intermediaries task force and other work on financial regulation more generally? Where should the public go for more information?
How will KiwiSaver affect employers?
What are the implications for financial providers?
22. 23. 24. 25.
26.
1.
Who is eligible to join?
From April 2007, employees aged 18 and over will be automatically enrolled when they begin a new job, but have the opportunity to opt out. Existing employees will be able to opt in to the scheme but will not be automatically enrolled by their employer. Employees under 18 and non-employees, such as the self-employed and beneficiaries, will be able to opt in to the scheme. Those already eligible for New Zealand Superannuation cannot join. 2. What is the expected participation rate?
It is difficult to predict how many people will join the scheme. There is little international evidence to draw on. Officials have assumed that up to 25 per cent of the eligible labour force may have joined the scheme after it has been running for five years. 3. What is the government’s contribution going to be?
The government will provide an upfront contribution per KiwiSaver account holder of about $1000. In addition, the government plans to negotiate fee levels and to fund ongoing fees up to a cap. The home ownership deposit subsidy will equate to $1000 per year of savings in the KiwiSaver, with a minimum of three years and a maximum of five years i.e. $3000 to $5000. 4. How will the 4 per cent and 8 per cent rate be calculated and what sort of amounts does it represent?
The 4 or 8 per cent will be based an employee’s salary or wages before tax. This includes salary or wages and other employment-related allowances such as sums receivable by way of bonus, commission, extra salary, gratuity, overtime or other remuneration of any kind.
Annual salary/wage income 4% weekly contribution 8% weekly contribution
$10,000 $30,000 $50,000 $80,000 $100,000
$8 $23 $38 $62 $77
$15 $46 $77 $123 $154
5.
How will members of existing superannuation schemes be affected?
KiwiSaver will complement rather than replace the existing registered superannuation scheme regime. This means existing schemes can continue to operate as they have done until now. The trustee and members of any existing registered superannuation scheme will have the option, if they wish, to convert to KiwiSaver, subject to meeting the KiwiSaver criteria. If they convert, members will be eligible for the government contributions to KiwiSaver. If an existing scheme does not convert, its members may choose to open a KiwiSaver account in addition to, or instead of, their existing scheme. Members of existing government schemes such as the State Sector Retirement Savings Scheme (SSRSS) and Government Superannuation Fund (GSF) will not automatically be entitled to the government contributions. 6. How does a contribution holiday work?
KiwiSavers will be free to stop and start contributing as they wish by applying for a contribution holiday for up to five years at a time. At the end of the five years, contributions will resume unless a further option to cease them is exercised. Inland Revenue will oversee this process. KiwiSavers will not be able to take a contribution holiday until they have been making contributions to the scheme for at least three months. 7. Can KiwiSavers borrow against their savings?
No. Scheme assets will not be able to be used as security for lending. 8. Will the money be protected?
KiwiSaver products will be regulated consistently with other superannuation products. Only approved providers will be able to participate in KiwiSaver. These providers will need to be registered, meet certain minimum ongoing requirements and disclose information to help people make a choice. The government does not guarantee any individual scheme. 9. How will this affect home buyers?
KiwiSaver will provide:  an ability for KiwiSaver participants to make a one-off withdrawal of their own savings to use for the purchase of a first home (excluding
the initial government contribution), following a minimum of three years participation  a deposit subsidy to people who have contributed to KiwiSaver for at least three years to assist with the purchase of their first home. This will be $1000 for each year of contribution, up to a maximum of five years. Regional house price caps and household income caps will be used to target this assistance.
The Mortgage Insurance Scheme (MIS) will provide:  assistance to households that can afford to service a high loan-tovalue mortgage, but who do not have a sufficient deposit to access a commercial loan. The government contributes towards the insurance on the loan, which means the lender’s risk is reduced. In this way, the MIS allows lending to people who would not normally qualify for a loan. Applicants must have a good credit history, not already own a home, and intend to live in the house.
10.
Which existing schemes will be eligible for the housing deposit subsidy?
Members of existing retirement superannuation schemes whose employers have an exemption from the automatic enrolment provision will also be eligible for the deposit subsidy if they save for a minimum of three years from 1 April 2007. (Employers’ exemptions only apply for existing superannuation schemes that have at least four per cent total contributions that vest immediately; that are offered to all permanent employees; and whose members have the ability to transfer funds to other similar products.) 11. Will the housing deposit subsidy drive up house prices?
The deposit subsidy is expected to be taken up by around 3000 households per annum, which is a small proportion of the total houses purchased in New Zealand each year. Therefore the subsidy is not expected to have a significant effect on house prices. However, as the subsidy will not become available until 2010, it is difficult to predict how it and other factors will influence house prices after that date. 12. Why is the government not providing tax cuts instead?
Tax cuts are expensive in aggregate, but do not deliver much to the individual. There are roughly three million taxpayers. Giving them $5 a week each will cost around $750 million a year. For tax cuts to make a difference, they have to be limited to the top end of the scale: they reward the better off disproportionately.
13.
Is the government doing anything to improve financial literacy?
International experience indicates that promoting financial literacy is key to ensuring the success of any retirement or superannuation savings package. The government plans to run an education campaign explaining KiwiSaver, as well as a more general financial literacy campaign aimed at explaining financial concepts and terms. These initiatives to improve New Zealanders’ financial literacy will be developed over the coming year. A financial capability survey is due to be undertaken in mid-2005, which will provide information on the current level of financial literacy in New Zealand.
How will KiwiSaver affect employers?
14. Do all employers have to offer KiwiSaver in their workplace?
Yes. All employees should have the opportunity of joining KiwiSaver. 15. Are small and medium sized enterprises exempt from the scheme?
No. However, the subsidy to payroll agents to meet PAYE-related compliance obligations imposed on small employers will help reduce costs for employers that take up the subsidy. The subsidy is voluntary and will apply to the first five employees of a small employer. 16. What about the self-employed?
Self-employed people will be able to contribute by making voluntary payments directly to Inland Revenue. Self-employed people will determine how much and how often they contribute. Those wanting to access the housing deposit subsidy must meet the same criteria as salary and wage earners. This will include providing evidence that they have contributed at least four per cent of their last three years’ taxable income (up to a maximum of five years). 17. Do employers have to give financial advice?
No. Employers will be provided with an information pack to give their employees that outlines how the scheme works, and provides details of how employees can receive further advice, including financial advice.
18.
Do employers have to contribute to the savings of their employees?
No, but employers can choose to contribute. Employers will have flexibility to determine most of the terms and conditions attached to their contributions. Ordinarily, these contributions will be treated in the same way as employee contributions. 19. How will employer contributions be handled to minimise compliance costs?
Employers will have the option to make contributions via IRD, along with their employees’ contributions. 20. Will this increase employers’ labour costs?
As employees are not being compelled to save, there should be no impact on labour costs. 21. What impact will KiwiSaver have on employers with existing schemes?
Employers with an existing registered superannuation scheme that has total contributions of at least 4 per cent (vesting immediately), provides full coverage to permanent employees, and allows employees to transfer balances to other comparable schemes, can apply for an exemption from the automatic enrolment provisions for new employees. However, any employee with such an employer can still opt in to KiwiSaver. Employers can still contribute to any existing superannuation scheme as they do now. Employers also have the option to convert their existing scheme into a KiwiSaver product if the scheme satisfies the KiwiSaver features.
What are the implications for financial providers?
22. What is the process for provider selection?
The government will use a combination of a tender process and a requirement to meet a set of minimum specified criteria to identify KiwiSaver providers. 23. Will provider numbers be limited?
The number of default schemes (for those who do not select a scheme) may be limited to ensure that the fees for these products remain low and
that schemes have an incentive to take small balances. However, the government is seeking to permit a wide range of other providers to encourage competition and innovation and reduce distortions to financial markets. 24. How will the schemes be regulated?
Schemes will be regulated in a manner consistent with registered superannuation schemes and the Superannuation Schemes Act 1989 framework will apply. This framework focuses on ensuring adequate disclosure, investor protection, registration of funds, and ongoing monitoring. The Government Actuary has oversight of all registered superannuation schemes. 25. How does this relate to the work of the financial intermediaries task force and other work on financial regulation more generally?
The recommendations of the financial intermediaries task force will feed into the review of the current regulatory environment for non-bank financial products and providers, which is being led by the Ministry of Economic Development. This review should provide a cohesive and effective framework for the regulation of financial products and providers, with legislative changes expected to be introduced into the House in 2008.
The government is also improving the quality of information disclosure by financial advisers and brokers, as well as business practices across the advisory industry. 26. Where should the public go for more information?
The website www.securingyourfuture.govt.nz contains links to a range of other sites for information. For questions about KiwiSaver, go to www.ird.govt.nz or ring the Inland Revenue on 0800 SAVE4ME (0800 728 346). For more information on the Mortgage Insurance Scheme, go to Housing New Zealand Corporation's website: www.hnzc.govt.nz